china goldreport may2011update

7/27/2019 CHINA GoldReport May2011Update

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Goldletter International 1 China Gold ReportMay 2011 Update

GoldletterII NN TT EE RR NN AA TT II OO NN AA LL the international independent information and advice bullet in for gold and related investments

May 2011 Update

China world leader in gold production since 2007

China has been a producer of gold for centuries and also has a history of usage thatstretches back to antiquity. The gold industry has depended entirely on State investmentsince 1949, when the Peoples Republic of China was founded. Domestic private andforeign investors were excluded from the industry.

Driven by domestic demand the government invested heavily in the mining industry in the 1990s and as aresult output doubled in six years. Chinas gold production for the first time reached 100 tonnes in 1995.In 2007, China passed the United States and South Africa as the second largest and largest gold producer,respectively.

South Africa dominated the gold mining industry more than a century since the discovery of the Witwatersreef in 1886, considered the greatest goldfield in the world on the edge of what is now Johannesburg. Thecountry became the biggest gold producer since 1905, passing the United States.

According to China Gold Association, China produced 340.88 tonnes of gold in 2010, up 8% on theprevious year (more than 26 tonnes).

According to the National Development and Reform Commission, from 2006 to 2010, Chinas gold productiontarget was 1,300 tonnes. During that period, China also aims to increase its gold base reserve by 3,000 to3,500 tonnes

Chinas top gold producing provinces are Shandong, Henan, Jiangxi, Yunnan and Fujian.

Chinas 10 largest gold mines inc lude China National Gold Group, Zijin Mining, Shandong Gold Mining,Shandong Zhaojin Group, Lingbao Gold, Eldorado Gold (China), Shandong Zhongkuang Group, Hunan JinxinGold Group, Yunnan Geology and Mineral Resources, and Shijiazhuang Jinyuan Mining.

The 2010 industrial output value of Chinas gold industry amounted to approximately RMB 220 billion yuan(US$ 33.8 billion) an increase of more than 70% compared with 2009.

According to China National Gold, Chinas gold consumption rose by about 4% to 430 tonnes, with growthin the countrys gold consumption staying intact in the coming years, but on a smaller scale than expected bythe World Gold Council.

Official trade data from Hong Kong, Asias biggest bullion trading centre and a main conduit for gold flows intothe mainland, showed its gold exports to the mainland in the first nine months of last year more than doubledfrom a year earlier to 88.06 tonnes.On an annualised basis that would translate into 117 tonnes of gold from Hong Kong alone in 2010.

China is finding new gold reserves at a fast enough pace to avoid exhausting supplies with productioncapacity holding pace with growing demand.

Chinas expansion process will be enhanced by the introduction of new ore processing technology like theapplication of bio-leach technology, a major subject of China's 10th 5-year Plan for key projects, and a newcyanidising technique (Thermal Chemical Pre-Oxidation Process) by normal pressure.


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According to the China Geology Survey Bureau (CGS), 5 major gold mines were discovered in 2007, with acombined gold reserve of some 600 tons. These include the Ghandu Gold Mine in Tibet (reserves 120 tons,the Dachang Gold Mine in Quinghai Province (reserves 115 tons), the Yuangshan Gold Mine in southernGansu Province (reserves 258 tons), the Sizhuang Gold Mine in Shandong province (reserves 52 tons) andthe Baolun Gold Mine in Hainan Province (reserves 55 tons).

Early 2008, it was reported that a new gold deposit with an estimate reserve of 24 tons has been found in

Xinjiang Uygur Autonomous region.

Geologists of the Shangdong Provincial Bureau of Geology and Gold Resources claimed to have found a golddeposit with a reserve of 103 tons. It is the second gold mine found just south of the famous Jiaojia Gold Minestrip of Laizhou near Sizhuang, where provincial geologists found another gold mine in 2007 with a deposit of51.83 tons.

Not only China's national gold industry, led by its three publicly traded major gold groups Zhongjin Gold (HKcode 3330), Zijin Mining (HK code 2899) and Zhaojin Mining (HK code 1818) is expected to get a strongboost, but also successful foreign exploration/development companies active in China will contribute togrowing production in the years to come.

Some of these companies have been taken over by Chinese gold groups, including Sino Gold, continentalMinerals and a 41.2% controlling interest in China Gold International (formerly Jinshan Gold Mines).

In 2010, Eldorado (ELD TSX.V) contributed 11 tonnes (358,000 ounces) to Chinas gold production, equalto approximately 3% of the countrys total gold output.

China's Gold occurrence

Advanced stage precious metals andbase metals projects and large areas ofmineral lands with potential exist in Chinaand, as a result, there has been a steadygrowth in the number of foreign miningcompanies being active in China.

About 50% of gold in China occurs inquartz-gold vein structures, with another17% occurring in placer deposits and theremainder is found in polymetallicdeposits, often in association with copper.Chinas gold industry is fragmented,archaic and undercapitalised. Most of theproduction comes from small,

underground mines with little mechanis-ation.There are thought to be over 1,200 small to medium sized mines in operation throughout the country, equal toapproximately 70% of total gold deposits and representing 25-30% of total proven reserves, with only a fewmines producing more than 100,000 ounces annually, although the annual average is closer to 16,000ounces.

The China Geological and Mineral Survey Bureau estimates the gold resources of Chinese ten majorprovinces to be over 11,000 tonnes and the countrys prospective gold resources at around 15,000 tonnes.

A joint study by the United States Geological Survey and the Tianjin Geological Academy from 1997 to 2002identified and reviewed over 160 gold occurrences in China. Within the category of sedimentary hosted gold

deposits (a broad category including Carlin style), over 20 million ounces of resources have been identified inChina versus over 70 million ounces in Nevada.


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The largest deposits of this style discovered to date in China include Lannigou (> 3.2 million ounces) andBaguamiao (> 2.5 million ounces) but exploration has generally been neither well funded nor extensive. Mostreserve definition programs are limited.

Chinas national gold industry

Control and ownership of many of Chinas largest mines is vested in the State and administrated through theChina National Gold Group Corporation (CNGC). First established in 1979 and then reorganised in 1993.GNGC, operating under China Gold Group, controls the major gold mines in seven out of eight mainproducing provinces. The GNGC officially controls 450 mines and has 61 affiliates across China.

Through the biggest gold producer of the Group, Zhongjin Gold, CNGC contributes 20% of total goldproduction in China, and shares 30% of total Chinese gold resources.

Between 1949 and 1982, China banned personal ownership of gold, not to mention a gold market. In recent

years, China gradually lifted its control over the gold market, by allowing the purchase of gold by individualcitizens.

The move to bring the local gold price in line with the international price, occurred from recommendations bythe World Gold Council (WGC) in 1998 as part of a timetable for deregulation of the market, there motivatedby Chinas acceptance into the World Trade Organisation at the end of 2001.

China Gold Association was formally founded in November 2001, with 70 enterprises as standing directors,and 256 enterprises as directors.The official opening of the Shanghai Gold Exchange (SGE) on 30 October 2002 heralded the start of a newera in the gold market in China, and is further evidence of the intention of the Chinese government toderegulate the precious metals markets.

In January 2008, Chinas gold futures made a strong debut on the Shanghai Futures Exchange.


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Government investing in gold mining sector

In the 1980s the Chinese government invested heavily in the gold mining sector. This policy continued andwas reinforced under the Eight Five Year Plan from 1991-1995. Government spending increased to US$ 1.5billion in 138 specific projects. The aim of this initiative was to restrict the informal and smaller sectors andconsolidate small mines into bigger and more efficient operations. The policy was not successful and by theend of the 1990 investment had fallen to US$ 12 million annually.

However, in the last five years China has made new efforts to improve its domestic environment for mininginvestment. Exploration is intensified by further exploring the old deposits, prospecting for new areas, andstarting special projects, with the emphasis on large and super large mineral deposits.Fundamental geological survey and resource evaluation under the supervision of China Geological Surveyhave been enhanced and the complete catalogue of geological data is online for query.

CHINA'S MAJOR NATIONAL GOLD PRODUCERS

China National Gold Group Corp. orChina Gold, is a large-scale state-owned enterprise. As an investment organization authorised by the centralgovernment, China Gold directly reports to the central government and it is

also a pilot company of which the government is as sole shareholder.

Being the earliest company in doing gold mining in China, China Gold has rich management experiences andstrength in both technology and capital. At the advanced level of world standard, China Gold has its goldoperations all over China, and contributes 20% of total gold production in China and controls over 30% of thetotal reserve in China, which guarantees its promising prospects.


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China Gold has a 57% controlling interest in Shanghai-listed Zhongjin Gold and controls Hong Kong-listedZhaojin Mining through a 37.3% interest owned by affiliated company Shandong Zhaojin.

The Yangshan Gold Mine, founded in 2007 in northwest Chinas Gansu Province, is considered to be thelargest Carlin-type gold mine in Asia and the sixth largest in the world. It is estimated to have depositsequivalent to at least 300 tons of gold, in the high-grade 96 vein ore.

In May 2008, China Gold completed the purchase of the 41.2% controlling interest of Ivanhoe Mines inJinshan Gold Mines for a purchase price of Cdn$ 217.7 million.

On April 24, 2011, China Gold announced that it plans to inject all of its gold assets in Zhongjin Gold in 5years.

Zhongjin Gold Co (100549 Shanghai Stock Exchange) isprincipally engaged in exploration and smelting of gold, copper, lead,silver and other non-ferrous metals. The Companys major products are

standard gold, mineral gold, smelting gold, electrolytic copper, content copper, silver, sulphuric acid and ironore concentrate, among others.

On July 30, 2003 Zhongjin Gold, 57%-owned by China Gold, became the first listed company in the nationsgold industry after it launched an initial public offering (IPO) on the Shanghai Stock Exchange. The Companyissued 100 million shares at a price of 4.05 yuan (US$ 0.49) per share. The IPO earned 388 million yuan(US$ 46.7 million) in net proceeds.

Zhongjin Gold, produced 85.82 tonnes (+ 4.3%) of standard gold and 19.7 tonnes (+ 15.9%) of mineral goldfrom its mines in 2010.

Zhongjin Gold has a current market capitalization of approximately RMB 48 billion (US$ 7.4 billion).

Zijin Mining Group (2899 Hong Kong) is Chinas largest and mostefficient gold producer andwas the first national gold production enterpriselisted overseas (Hong Kong in 2003). The Company and its subsidiaries are

a comprehensive mining conglomerate in China engaged in gold production, and specifically engaged in theexploration, mining and sale of gold and other non-ferrous metals.

In 2010, Zijin produced about 69.07 tonnes of gold (including 29.18 tonnes of mine produced gold).

At the end of 2010, Zijin retained resources reserve (audited) of 750.17 tonnes of gold (+5%); 1,827.9 tonnes

of silver; 10,5787 million tonnes of copper; 392,500 tonnes of molybdenum; 5.23 million tonnes of lead andzinc; 173,400 tonnes of tungsten; 184.5 million tonnes of coal; 99,290 tonnes of tin; 607,100 tonnes of nickeland 66.73 million tonnes of sulphur iron (standard ore).

In 2010, Zijin obtained new resources reserve (partially, not yet audited): 71.83 tonnes of gold, 1,014.000tonnes of copper, 1,782.000 tonnes of zinc and lead, 78,000 tonnes of molybdenum and 3 million tonnes ofiron ore.

Zijin owns 275 exploration rights with a total area of 5.52 square km, in which 43 overseas exploration rightswith a total area of 314.75 square km, and 63 mining rights with a total area of 154,643 square km, in which 6overseas mining rights with a total area of 5.68 square km.

Zijin has a current market capitalization of approximately US$ 10.9 billion (10.5 billion A-shares + 4.0 billionH-shares).


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Lingbao Gold (3330 Hong Kong) is an integrated gold mining enterprise in China which ismainly engaged in gold mining, smelting and refining. The products of the Group are gold, silver,copper products, copper poils and sulphuric acid. Its miner resources are scattered in the regionof Henan, Xinjiang, Jiangxi, Inner Mongolia, Gansu and Kyrgyz Republic, with 56 mining andexploration rights covering a total area of 2,222.74 sq km.

In 2010, Lingbao produced approximately 14.58 tonnes of gold (approximately 469,000 ounces).

Lingbao has a current market capitalization of approximately HK$ 1.8 billion (US$ 240 million).

Zhaojin Mining Industry (1818 Hong Kong SE) is controlled byChina Golds affiliated company Shandong Zhaojin Group (37.3%interest). Currently the Company owns 33 subsidiaries, joint venture andassociates nationwide, amongst them 6 operating mines within theZhayuan district in the Jiadong peninsula of Shandong Province,

namely: Dayingezhuang, Jinchiling, Xiadian, Hedong, Jintinglin and Canzhuang.According to the China Gold Association, gold resources in the Zhayuan district account for approximately0% of gold reserves in China.

In 2010, Zhaojins total output of gold amounted to 672,811 ounces of gold (+ 7.4%).

As at the end of 2010, Zhaojins gold ore resources under the JORC code were approximately 15,9 millionounces (as at year end 2009: 10.86 million ounces), and mineable gold reserves were approximately 8.1million ounces (7.0 million ounces).

Zhaojins current market capitalization is approximately HK$ 13 billion (US$ 1.7 bilion).

Shandong Gold Mining (600547 Shanghai Stock Exchange) one ofChinas top-3 gold producers, increased its gold production in 2010 by 18%

from a year earlier to 25 tonnes (17.7 tonnes).

The Companys gold production is likely to accelerate in coming years since in the 5-year period ending 2010Shandong found 800 tonnes of gold resources through exploration with a total investment of 1.15 billion yuan(US$ 172.6 million).

On April 22, 2011, Shandong announced that it will issue up to 120 million A shares at not less than RMB46.80 per share to raise approximately RMB 5.62 billion (US$ 374.5 million) in am private placement.Ther proceeds raised will be used to extend gold resources.

Shandong Gold Mining has a current market capitalization of approximately RMB 66 billion (US$ 10.2 billion).

Government encouraging foreign investment

One of the specific aims of the 1990s initiatives was to try and attract foreign investment into the Chinesegold mining industry. However, the lengthy and complex approval process, the limited and poor quality ofdesigned exploration projects, coupled with a legal system that was unclear about ownership and withoutguarantees of tenure, was enough to deter most candidates. In addition, the mining taxation code did notencourage investment. However, changes in regulation adapted by the Chinese government haveencouraged provincial mining bureaus to source capital from mineral exploration companies.

In 1996 China passed the mineral resources law on mineral exploration and development by which The State

shall safeguard the national development and utilisation of mineral resources under the responsibility andsupervision of the Ministry of Land and Resources (MLR).


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By this legislation MLR has promised to reform the approval process and the costs associated with securingexploration rights in China, and in doing so to encourage foreign investment in an industry yet to experiencethe transformation brought in other sectors of the nations economy. The laws and notices issued in 1998 and2000 clarified the exploration process and the transfer and assignment of exploration rights.

In 1999, Chinas Ministry of Land and Resources announced a total of 16 projects be recommended forinternational investment.

In February 2006, the MLR published the Selected laws and regulations of the Peoples Republic of China onMineral Exploration and Development.

The Chinese Central Government has granted Provinces the autonomy to approve Sino Foreign JointVentures for mineral exploration and mining. This provision of the law has attracted a number of mainlyCanadian public companies that have been entering into Sino - Foreign Joint Ventures.

The Provision on Guidance for Foreign Investment issued by the State Consul, highlights the protection ofinvestors legal rights and interests.In the new Guidance Catalogue of Industries for Foreign Investment revised by the National Department andReform Commission, the exploration and mining of special and scarce types of coal, precious metals such as

gold, silver and platinum metals, precious non-metallic minerals such as diamonds, as well as phosphorus,barite, borax and celistite, is categorised as the restricted category.

The form is China-Foreign Joint-Venture and cooperation and the requirement of the Chinese sides holdingsare articulated in specific catalogue of encouraged and restricted categories.

Various policies to encourage investment in Western China will also have impact on the proposed structure ofan exploration vehicle. Projects based in Central or Western China (including Sichuan), although listed asrestricted, may in fact be treated as encouraged. The exploration right granted will typically only be for aparticular mineral in the exploration area, and not for all minerals found at the same site.

Exploration licences can only be granted to qualified, geological exploration work-units registered in China.

Foreign investors will either need to obtain this qualification. Subject to any restrictions set out in theCatalogue and the qualification requirements, a foreign investor registered in China as a representative office,equity or co-operative joint venture, including a non-legal person, co-operative joint venture, or a whollyforeign-owned enterprise, may apply for an exploration licence.At present, the Geological Survey Department of MLR, which has 26 affiliated organizations and 6 regionalcentres, is responsible for reviewing and approving exploration applications. Provincial authorities are entitledto issue exploration rights, but they cannot issue them to foreign invested enterprises or representativeoffices.

In 2003, the MLR issued a circular entitled Administrative Measures of Public Tendering and Auction for theRights of Exploring and Exploiting Mines. The bidding regulations promulgated by the MLR, effective fromAugust 1, 2003, prescribe three approaches for Chinese and foreign mining companies to obtain explorationand mining rights.In December 2003, the Chinese Government issued a white paper on Chinas Policy on Mineral Resourceswhich stresses that China will depend on exploitation of domestic mineral resources to guarantee the needsof its modernisation drive. In future, China will strengthen mineral surveying, prospecting, exploitation,planning, management and rational utilisation of mineral resources.

The policy also highlights the importance of sustainable development, and Sino-foreign co-operation in theexploration and exploitation of mineral resources will be increased.


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Comments to activities of foreign exploration companies in China

The suggestion has been made in the past that China does not host any sizeable, continuous gold depositemendable to commercial production based upon the fact that the largest mine was producing in the region of100,000 ounces gold annually with the annual average closer to 16,000 ounces. This picture is outdatedhowever, as growing production from its major national mines is demonstrating, and production from a

growing number of gold projects developed by foreign companies came on stream.

Missing many of the sophisticated techniques of the western approach including highly sensitive geochemicaland geophysical survey as well as high-end interpretation of satellite imagery, China is relativelyundiscovered, This offers a high potential for successful exploration.

On the other hand, Chinas government could be more cooperative by shortening the time of mining licencesbeing approved to foreign companies with a resource base.


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GoldletterInternational, P.O. Box 76988, 1070 KGAmsterdam, the Netherlands Marino G. Pieterse, Publisher and Editor Information andinvestment comments are independently and thoroughly researched and believed correct. No guaranty of absolute accuracy can be given how-ever. Investment decisions are fully made for own risk. VAT number NL0510.66.075.A.01 Chamber of Commerce 37108483 tel.: +31-

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